The OPEC Reference Basket emerged in September on a strong bullish note as Hurricane Katrina whirled through the Gulf of Mexico significantly damaging oil operations. However, the bullish momentum was short-lived due to fears that sustained high prices in the wake of Katrina would result in lower economic growth. The Basket averaged $58.98/b in the first week, a drop of $1.60 or 2.6%. Bears continued to dominate in the second week
following the announcement of the IEA plan to release 2 million barrels per day of crude and fuel products
for 30 days as well as a statement by US officials that the SPR could be tapped this winter in the event of a supply crunch. Hence, market pressure eased and the OPEC Reference Basket saw a hefty drop of 4% or $2.19 in the second week to $56.79/b. The recovery of oil operations to a somewhat normal level also helped bears to revive, with prices drifting lower on an IEA forecast for lower-than-anticipated global demand in 2005 amid fund sell-offs in the futures market. However, another hefty draw on the US crude oil stocks pushed the Basket higher towards the end of the second week.
During the third week, the expectation of higher OPEC output ahead of the 137th Meeting of the Conference kept the market calm. However, bullishness soon revived with the appearance of Hurricane Rita in the Gulf of Mexico. The Basket jumped $1.35 or 2.4% in the third week to average $58.13/b on concern over another wave of hurricane damages. However, several refinery outages in the US Gulf Coast were seen to imply less demand, which pushed prices lower. This perception was amplified by a strike at French Total’s refinery, which freed up even more barrels to an amply supplied market, and feed into the general impression that higher petroleum prices were eroding demand. In the final week, the Basket slipped a marginal 51¢ to close at $57.63/b. The US administration’s announced willingness to tap emergency reserves further supported the calmness of the market. Hence, sell-offs for profit-taking in the futures market added to the downward pressure on the petroleum complex. As a result, the Basket closed the second week at $55.23/b.
On a monthly basis, the bears dominated most of the month, although sizeable damage by Hurricane Katrina followed by Hurricane Rita kept the market alert. The bullish trends were balanced by the emergency response of the IEA to release some 2 mb/d of crude oil and products as well as the OPEC decision to make available to the market 2 mb/d of spare capacity if needed. Thus, the OPEC Reference Basket in September rose slightly higher by 6¢ to average $57.88/b for the month, after drifting lower from a second-decade rebound. The Basket continued to slip with the month to date average standing at $55.55/b on 13 October on the continuing perception that higher prices were eating into demand.
US market
The US cash market emerged on a bullish note amid healthy refining margins after Hurricane Katrina roared through the US Gulf Coast. Differential rose for the deepwater crude as Shell’s Mars platform remained out of
service. The movement of sweet/sour crude was even furthered by the slowdown in output recovery. The
WTI/WTS spread remained at a wide $5.41/b while the light sweet crude soared to over $68/b in the first week.
The upward trend continued into the early part of the second week as more than half of the Gulf of Mexico
production was out of service due to damages from Hurricane Katrina. However, differentials fell as the US government released strategic stocks to the US market. The WTI/WTS spread narrowed to $4.97/b as the light sweet grades fell to $65.74/b, for a drop of nearly 4%. Concern over prolonged oil production outages continued and alertness dominated the marketplace. However, when interest for SPR crude was less than anticipated, the bears took over as the government offered 30 mb while the interest was only for 11mb even though at a time when production capacity rose to above 50%. Hence, the WTI/WTS spread widened to $45.26/b in the
third week while WTI’s weekly average slipped $1.63 to close at $64.11/b, the lowest level since 11 August. The bearish trend persisted on the perception of higher OPEC output ahead of the Meeting of the Conference. Nevertheless, Hurricane Rita threatened oil operations in the Gulf of Mexico, triggering concerns over tight supply. The WTI/WTS spread narrowed to $4.97 as WTI surged to $65.84/b. However, as Rita hit oil infrastructure in the US Gulf Coast, the sweet/sour spread remained wide on fears over petroleum product supply shortfalls amid prolonged refinery outages. The WTI/WTS spread widened to $5.09/b as WTI inched lower to $65.72/b.
European market
The market in Europe weakened at the start of the month on a volatile futures market and turmoil in the wake of
Hurricane Katrina, which fostered uncertainty over crude demand. The bears gained strength following the
release of petroleum products by the IEA. Moreover, refinery maintenance in September weakened demand at a time when traders were looking at potential transatlantic arbitrage opportunities. North Sea crude differentials continued to fall as sellers struggled to move lingering September cargoes even as the October loading
programme emerged. Brent closed the first week down $2.57 or nearly 4% on average at $63.82/b. The bearish sentiment remained into the second week amid the release of the October loading programme which revealed higher volumes than in September. The downward pressure was furthered as buyers stayed on the sideline in an attempt to dampen the price differential. Brent’s second weekly average fell a further 3.5% or $2.21 to settle at
$61.61/b. The poor showing continued in the third week as a surplus of prompt cargoes weighed on prices. However, the sentiment was little changed as overhung September cargoes cleared out while October loading picked up. The market’s inspiration was triggered by the appearance of Hurricane Rita, which sent fear of supply shortfalls in both streams and roiled the futures market. Hence, Brent’s weekly average price surged $1.66 or 2.7% to close at $63.27/b in the third week. Nevertheless, the sentiment was short-lived as the market continued to re-assess the impact of Hurricane Katrina at a time when Hurricane Rita added to the burden of already shutin
downstream facilities. Moreover, the strike at France’s Total refinery heightened uncertainty about crude demand. Therefore, Brent’s final weekly average dipped almost $1 or 1.6% lower to close at $62.29/b.
In the Mediterranean, sentiment on Urals was uncertain as refiners cited an overhang of prompt cargoes, although the market could easily have tightened. Hence, differential for Urals firmed in the first few days of September, but sentiment was uncertain as dealers struggled to assess whether extra crude might head west in response to Hurricane Katrina. However, strong refining margins supported buying interest for Urals. Hence, the Brent/Urals spread narrowed in the first week by 60¢ to $5.28/b. Urals crude differentials continued to rise, as
strong refinery margins at levels similar to those for sweet crude encouraged refiners to stick with — or switch to — sour crudes, adding to demand that had spurred buying interest for the grade. However, the bullish sentiment eased as dealers considered the impact of Mexican crude oil being offered for sale into the Mediterranean market. While refiners adopted the wait-and-see stance in the hope of a further fall in price differentials, sufficient availability and some buying interest appearing in the north and the south left the market balanced in the second
week. Hence, the Brent/Urals spread narrowed further by 50¢ to $4.78/b. The clearing of September stems and the movement of the October programme amid strong refining margins continued to spur demand in the third week. This caused the Brent/Urals spread to narrow a further 55¢ to $4.23/b. This bullishness was sustained on healthy refining spreads and the clearance of early October loading programmes. Thus, the Brent/Urals spread narrowed a further 44¢ to $3.79/b.
Far East market
There was a bullish start to the month for Mideast crude as traders prepared themselves for the August Oman
retroactive OSP, which though it was set at a record high, was expected to show a fall in Oman's premium to Dubai. November Oman was discussed at a 10¢/b discount to parity with respect to the MOG. In the first week, Abu Dhabi's Murban crude jumped on the impact of Hurricane Katrina. The first Murban cargo for November loading was sold at a premium of 50-60¢/b to ADNOC’s OSP while November Oman was on offer at a 10¢/b premium to MOG. Meanwhile, Oman raised the August OSP to a record high of $56.97/b, up $3.50 from
July, yet it sharply cut its premium to Dubai to 37¢ from 64¢ in July. This left Oman at its lowest premium level to Dubai since August 2002 when it was set at 30¢/b. Hence, the lower than anticipated OSP anchored the grade firmly into premiums for the first time in three months. Meanwhile, Abu Dhabi’s ADNOC raised the retroactive selling price of its key Murban crude for August-loading by $3.85/b to a record high of $60.95. However, November Murban eased as buyers stayed clear of the $1/b premium discussion levels prompted by supply disruptions following Hurricane Katrina. Moreover, although most Mideast producers cut the October
price differentials with the Brent/Dubai EFS narrowing, healthy Asian buying interest amid concern over supply disruption in the Western hemisphere kept bulls intact. However, the sentiment flipped in the second week as outright prices were falling on the release of IEA petroleum stock data. As a result, November Oman traded at a 1¢ premium to the MOG with Murban assessed lower at a 50-80¢/b premium, down from the $1/b level earlier in the month. Oman even moved toward a discount when it was discussed at a 5¢ premium. Sentiment on the
Middle East crude market turned increasingly bearish, as refiners remained on the sideline and fears mounted that crude oil demand was weakening in Asia. Middle Eastern crude values fell on weaker refinery demand, forcing sellers to cut offer levels amid the threat of US refinery closures diverting Atlantic Basin supplies into the region. The bearish sentiment continued as many industry participants were engaged in the annual APPEC conference in Singapore. November Murban was assessed at a 30¢ premium to the OSP with Oman at a slight discount.
Asian market
In the Asia Pacific region, an early perception that regional crudes could flow west in the wake of Hurricane Katrina kept the bulls alive. Light sweet crude was clearing at a rapid pace early in the month with Malaysia's Petronas selling several cargoes even as Tapis APPI surged over $70/b for the first time. Bintulu traded at a 75¢/b premium to the APPI compared to the usual 30¢ discount, which would leave Tapis at a $1.05/b premium. The bullish sentiment was sustained as Asian refiners continued to snap up light sweet crude and condensate as demand for gasoline and naphtha in Asia and the USA drove up the market. With the high outright prices,
Malaysia's Petronas sold an October Tapis cargo at an 88¢/b premium to Tapis APPI. Heavy sweet crudes also traded but at lower prices than earlier expected. October Duri crude traded at a $1.30-1.40/b premium to the grade's Indonesia Contract Price (ICP), slightly weaker than the last assessments for September Duri crude as Japan required smaller volumes with the peak summer electricity demand ending. Light sweet crude sellers were testing the market for their November-loading cargoes, as most October barrels were sold out. Some traders hoped that gasoil would attract interest in Europe and gasoline demand strengthening further on
increased US requirements, where four refineries remained shut from Hurricane Katrina, which forced refiners to replace heavy sour grade with light sweets. Hence, Malaysia sold its first cargo for November delivery at a $1-1.10/b premium. However, high outright prices pressured regional sweet crude to trade lower as Tapis was heard sold last at a $0.95-1.00/b premium to the APPI. Moreover, the return of Indonesia’s sweet crude CDU to the Cilacap refinery supported the premium for regional crudes at month’s end.
